ECONOMIC REPAIR QUANTITY Similar to the Concept of an Economic Order Quantity: Due to the costs incurred each time we induct, it may be more economical to induct a monthly quantity of repairs at one time Existence of an Economic Repair Quantity (ERQ) makes it possible to compute a Repair Requirement Objective (RO) Repair-RO can be used to improve our repair metrics and authorization policy When the cost to repair an item is significantly less than the cost to purchase an item, re-supplying the wholesale level with repaired items is more economical. The Economic Repair Quantity is somewhat analogous to the Concept of an Economic Order Quantity. Due to the costs incurred each time we induct a repair, it may be more economical to induct a monthly quantity of repairs at one time. Existence of an Economic Repair Quantity (ERQ) makes it possible to compute a Repair Requirement Objective (RO). The Repair – RO can be used to improve Department of Defense (DoD) repair metrics policy. The Army Materiel Systems Analysis Activity (AMSAA) supplied these charts to show how AMSAA recommends to theoretically apply Economic Repair Quantities at the wholesale support level.

Economic ORDER Quantity Economic REPAIR Quantity ERQ CONCEPT Economic ORDER Quantity Economic REPAIR Quantity Quantity economical to Procure at the Reorder Point Used to provide an economical tradeoff between Holding Cost and Admin Procurement Cost Larger EOQ = Increased Holding Cost Smaller EOQ = Increased Admin Cost Quantity economical to Repair at the RAP Used to provide an economical tradeoff between Holding Cost and Repair Induction Costs Larger ERQ = Increased Holding Cost Smaller ERQ = Increased Induction Cost Repair induction costs may include: MSC/IOC/Depot Admin costs associated with authorizing repair funds/scheduling/etc. DLA Issue & Receipt Charges Repair Shop Set Up costs An Economic Order Quantity (EOQ) is the Quantity economical to procure at the reorder point. With DoD, the EOQ is based on an economical tradeoff between the Holding Cost and Administrative Procurement Cost. A larger EOQ has an Increased Holding Cost. A smaller EOQ has an Increased Procurement Cost. An Economic Repair Quantity (ERQ) is the quantity economical to repair at the Repair Action Point (RAP). The ERQ is based on an economical tradeoff between the Holding Cost and Repair Induction Costs. A Larger ERQ has an Increased Holding Cost. A Smaller ERQ has an Increased Induction Cost. Repair induction costs may include the Commodity Command and Depot Administrative cost associated with authorizing repair funds and scheduling, the cost for Defense Logistics Agency (DLA) issue of repair parts and receipt charges, and the repair shop set up cost. Cost Holding Induction ERQ

ERQ COMPUTATION ERQ Months Induction cost AMD 2 * Induction Cost * AMD * (1-Replacement Rate) Cost to Repair * Holding Cost Rate ERQ Months Washout rate Repair cost Holding cost AMD * (1-Replacement Rate) Larger ERQ for smaller $ Value repair programs Replacement Rate) This Economic Repair Quantity (ERQ) computation was provided by the AMSAA. It is somewhat analogous to the EOQ computation. One (1) minus the Replacement Rate represents the percentage of items repairable. AMD is the Average Monthly Demands. AMD multiplied by 1 minus the Replacement Rate yields the average number of repairable demands per month. According to the computations and its graph, a smaller cost to repair and a smaller holding cost rate yields a larger ERQ. Larger ERQ for smaller Holding Cost Rate

ASSETS vs. REORDER POINT Reorder Point used to decide when to Buy Buy when Assets ≤ Reorder Point Assets Reorder Point Due-in from Repair & Procurement Protected War Reserves Net Procurement Lead Time Demand Serviceables On-Hand The amount of assets of an item in inventory is compared to Reorder Point quantity in the bar graph. The Reorder Point is a decision point as to when to buy. When the total inventory assets are to the Reorder Point, the Quantity Discount Economic Order Quantity should be bought. When determining inventory assets, it includes previous Due-Ins from Repair and Procurements that were not yet received, Serviceable Items On-Hand, and Unserviceable Items On-Hand that may be repaired later. The Reorder Point includes protected War Reserve spares if applicable, the Net Procurement Lead Time Demand Quantity and Safety Level inventory due to demand and Procurement Lead Time variability. An empirical Safety Level formula is also provided by AMSAA. The EOQ divided by 2 plus the Safety Level is the average quantity in inventory. Based on the formula, the safety level increases when the average quantity in inventory and the Procurement Lead Time increases. Unserviceables On-Hand Safety Level Empirical Safety Level = [(EOQ/2) +SL] x [Procurement Lead Time / 60 months]

ASSETS vs. REPAIR ACTION POINT Repair when Applicable Assets ≤ Repair Action Point Applicable Assets Repair Action Point Applicable Due-in from Repair & Procurement Protected War Reserves 1 month Gross Demand Gross Repair Lead Time Demand Serviceables On-Hand The amount of assets of an item in inventory is also compared to the Repair Action Point (RAP) quantity. The RAP is a decision point as to when to repair. Repair actions are supposed to occur when Applicable Assets reduce down to the RAP. For repair determinations, unserviceable items on hand are not counted as applicable assets. When repairing, Applicable Assets only include previous Due-Ins from Repair and Procurements and the Serviceable Items On-Hand. The Repair Action Point includes any protected War Reserve spares, one month of Gross Demands, the Gross Repair Lead Time Demand quantity and the Inventory Safety Level due to demand variability and repair lead time variability. The one month of gross demands is probably associated to an Army constraint of scheduling repairs on a monthly basis. Safety Level

TWO SAFETY LEVELS SLprocurement SLrepair Acquisition Price EOQ (Order Qty) Procurement Leadtime SLprocurement Reorder Point Replacement Demand Rate Repair Price ERQ (Repair Qty) The Safety Level (SL) associated with procuring items is different from the SL associated with repairing items. The EOQ for reordering is dependent on the acquisition price and replacement demand rate. The SL for ordering is dependent on the Procurement Lead Time (PLT) and replacement demand rate. The Reorder Point is based on this SL quantity and the number of expected demands over the PLT. The ERQ for repairing is dependent on the repair price and repair demand rate. The SL for repairing is dependent on the Repair Lead Time and repair demand rate. The Repair Action Point is based on this SL quantity and the number of expected demands over the Repair Lead Time plus 1 month of gross demands. Repair Leadtime SLrepair Repair Action Point Repair Demand Rate

OVERVIEW OF REPAIR ACTION POINT Don’t want to induct Too Soon: Incur unnecessary additional Holding Cost Don’t want to induct Too Late: Incur Backorders So what’s the latest we can wait to repair without incurring backorders ?? In a Perfect World: Wait until we have just enough units left to fill demand during RLT Repair Action Point = RLT * AMD RLT = Repair Lead Time in months AMD = Average Monthly Demand In the Real World: Add a Safety Level to protect against uncertainty in RLT and AMD Repair Action Point = ( RLT * AMD ) + SL Repair-SL considers just repair variability / repair costs WHOLESALE: REPAIR RETAIL: This is AMSAA’s overview slide of the Repair Action Point (RAP). If repairs are inducted too soon, unnecessary additional Holding Costs will be incurred. If repairs are inducted too late, backorders are likely to be incurred. So what’s the latest wait to repair without incurring backorders? In an ideal world, the wait time would cover just enough units left to fill the demands during the Repair Lead Time (RLT). The RAP would equal the RLT in months times the Average Monthly Demand (AMD). In the real world, there is also the addition of Safety Level (SL) quantity to protect against variability in RLT and AMD. The Repair Action Point adds in this SL quantity.

THEORETICAL INVENTORY MANAGEMENT PROCUREMENT DECISIONS: Assets Economic Order Quantity BUY Net Leadtime Demand Reorder Point = SL + Time Jan Feb Mar REPAIR DECISIONS: Applicable Assets Theoretical Inventory Management Procurement decisions are made at or below the Reorder Point to bring assets up to a Requirement Objective Quantity that includes both the Economic Order Quantity plus the Reorder Point Quantity. Theoretical Inventory Management Repair decisions are made at or below the Repair Action Point (RAP). Once the RAP decision is hit, it may take a month to fund and schedule the repair actions. This possibly explains why AMSAA added in one month of gross demands being added to the Repair Action Point. REPAIR Repair Action Point Gross Leadtime Demand REPAIR = SL + Time Jan Feb Mar

Single Item PROCUREMENT-SL vs. ASSETS The Procurement-Safety Level is used to calculate the Reorder Point The Reorder Point + EOQ is the level we Buy up to Therefore, a larger Procurement-SL means more Assets Due-In Service. Assets Due-In Assets SL Reorder Point Due-In Service. Assets SL Net PLT Demand SL Unserv. Service. Due-In This slide reiterates the impact of a Safety Level (SL) for procuring items. The Procurement-SL is used to calculate the Reorder Point. The Reorder Point and the Economic Order Quantity (EOQ) is the level we buy up to, which is called the Requisition Objective. Therefore, a larger Procurement-SL means more assets in inventory before ordering the EOQ. SL Service. Unserv. Net PLT Demand Net PLT Demand Net PLT Demand Unserv. Unserv. Smaller SLprocure Larger SLprocure SLprocure = Million

Q1: Is the Repair Safety Level always larger than the TWO COMMON QUESTIONS Q1: Is the Repair Safety Level always larger than the Procurement Safety Level ? A1: No Q2: Doesn’t more Safety Level always mean more Inventory ? A2: No This leads to two common questions. First, is the Repair Safety Level always larger than the Procurement Safety Level which advocates having more assets in inventory when the RAP is reached relative to the amount of assets in inventory before the Reorder Point is reached. The answer to this is NO! Second, does more safety level mean more inventory? Surprisingly, the answer to this question is also NO.

SAFETY LEVEL vs. REPAIR COST With regard to the Repair Safety Level, it tends to be larger than the Procurement SL until the repair cost exceeds 50% of the Acquisition Price. As the Repair Cost becomes close to the Acquisition Price, the Procurement SL becomes larger than the Repair SL making procurement the preferred alternative relative to repair. As a rule of thumb applied by the Army, repairing is the preferred alternative for newer items until the repair cost exceeds 65% of the Acquisition Price. For items toward the end of their useful life, repairing may be the preferred alternative when it is less than 50% of the Acquisition Price.

Single Item REPAIR-SL vs. ASSETS The Repair-Safety Level is used to calculate the RAP The RAP is used to decide when to Repair A larger Repair-SL just means we induct more quickly A different mix of Serviceables and Unserviceables But the same Reorder Point, and the same average Assets Assets Assets Assets Assets Due-In Due-In Due-In Due-In Reorder Point Service. Service. Service. Service. This slide reiterates the impact of the Safety Level (SL) for repairing items. The Repair SL is used to calculate the Repair Action Point (RAP) and the RAP is used to decide when to repair. The larger repair SL means that repairs are inducted more quickly leaving more serviceable assets in inventory. A Repair SL impacts the mix of Serviceable and Unserviceable assets in inventory. Holding the Reorder Point constant, the same average amount of assets are in inventory. When the SL for repair is small, repairs are inducted less quickly leaving more unserviceable assets in inventory. Unserv. Unserv. Unserv. Smaller SLrepair Larger SLrepair SLrepair = Million

Repair-Requirement Objective Repair-RO Economic Repair Qty 73 RAP 1 Mon Dem 35 RLT Demand 108 Repair-SL 106 This slide introduces the Repair-Requirement Objective. The Repair Action Point (RAP) is the sum of one month of gross demands plus the repair lead time gross demands plus the repair SL quantity, and the authorized war reserve quantity. The Repair Requirement Objective is equal to the RAP plus the Economic Repair Quantity minus the one month of gross demands. War Reserv. 50